Franklin Templeton is leaving no stones unturned when it comes to the alternative investment space, according to CEO Jenny Johnson.
In recent years, the global investment manager has partnered or acquired companies that have enabled it to provide access to private credit, private real estate, secondary private equity and hedge fund offerings of K2 Advisors. Its private asset space has grown to $260 billion.
“It’s really based on what we believe is a secular change in investing in the industry,” said Johnson, who is president and CEO of Franklin Templeton. She explained that the private credit market has been fueled by banks pulling back on lending and preserving capital for their best customers. She also said that private equity firms are choosing not to go public as quickly as they did in the past.
In fact, she pointed out that in 2000, the average company went public after three years; in 2019, it was nine to 10 years; and in 2022, companies waited 14 to 15 years before they went public, she said. “The early stage of those growth years is now being captured in the private market, and we looked at that and said, OK, that’s clearly a trend that’s not going away.”
Johnson, who spoke last week during the Inside Alternative virtual event sponsored by Financial Advisor and the MoneyShow, further noted that “massive amount of infrastructure” for areas such as energy transition will require a lot of investments. Franklin Templeton, she said, has not yet acquired an energy-based company, “but it’s an area of interest for us and we think it’s an important growth area.”
Johnson said big opportunities lie in the real estate sector, mainly in the industrial space, such as data centers and warehouses for data centers. She believes multifamily dwellings could be a good area because rents continue to rise. And she also sees opportunity in the debt side of real estate because of the strain on the office sector. “You can actually be very picky if you’re providing debt to the real estate sector,” she said.
A relatively newcomer to alternatives, Johnson noted that Franklin Templeton has made a commitment to educate advisors so they can fully understand the investment capabilities. Last November, the firm launched its alternatives education program, which offers a comprehensive curriculum that includes courses on private equity, real estate, private credit, infrastructure and hedge strategies for financial professionals.
Also, in March, it hired author Tony Davidow as senior alternatives investment strategist of the Franklin Templeton Institute, in part to help advisors develop a deeper understanding of alternative investments and the role they can have in their portfolios.
Johnson said there are two areas advisors raise in her discussions with them. One is that they don’t have a back-office staff to handle the paperwork that goes along with these types of investments, and that they need understanding of how these investments fit in their overall portfolio as well as how to help clients feel comfortable with them.
In response, she said, they have invested in alternative investment platforms such as CAIS and iCapital to help with streamlining the paperwork in the private market. She also noted that the Franklin Templeton Academy engages advisors in a lot of training. She noted that they have created a team of 35 specialists “whose sole focus is to be brought in by a wholesaler to go deep on understanding the alternative business,” she said. “So, it’s both leveraging the curriculum of the academy as well as specialists being able to work with advisors.”
Johnson said this training for advisors is crucial because “if an advisor puts a client in one of these investments and it turns out that is wasn’t suitable for the client because they needed their money for some reason, that becomes an issue for that advisor. ... I would say at Franklin Templeton, our job is to provide products that cover the full spectrum of risks and risks can be illiquidity risks, as but we have to define and describe so the clients understand exactly what they are investing in.”
Advisors, she said, have told her that they start with real estate because it’s an area their clients understand. Johnson said she agrees that it could be difficult to describe the secondaries to clients, but “its’ such a phenomenal opportunity right now.” She pointed out that $6 trillion has been deployed in the private equity market and about $150 billion in secondaries. Also referred to as secondary funds, secondaries purchase existing interests or assets from primary private equity fund investors.
Looking ahead in the wealth manager space, Johnson said they believe tokenization will become more prolific in the financial services industry back offices. She said people get distracted by debating about bitcoin and what has happened with FTX but put that aside and just think about the technology that creates efficiencies. “It takes the frictional cost out of transaction. “If you could take the friction or excessive fees that happen in a transaction, then you can reduce the size of a transaction to still make it profitable,” Johnson said.
Another area Franklin Templeton has focused its investment on is fintech. Johnson said even though the company, which was founded by her grandfather, is public, family is still involved, “and I would say what stresses me out is that I didn’t leave the company to a fourth generation,” she said. ”You have to think longer term,” she added, noting that she looks at the big trends and one of them is customization.
“I think ultimately ETFs will be expressed in blockchain and tokens and I think a lot of what today is in a mutual fund, or an ETF will be delivered in a separately managed account,” Johnson said. “It will be tax-optimized, and it will include … a personal passion of the investor,” she said.
Johnson added that she is excited and optimistic about AI, which she said is a part of the company’s incubator in Silicon Valley. For one, she said, AI is going to be disruptive to fractional farmlands, as there is a company that has built the technology to do that. And she believes ChatPDF will play an important role in how active managers consume data. Johnson is also optimistic that ChatGPT will translate into more opportunities, not less.